NSE can’t stop companies from delisting — Onyema

22 of january 2018

Last week, the Nigerian Stock Exchange, NSE, held a session with stakeholders in the capital market where it reviewed activities in the stock market for the past year and also made projections into the new year.

Some of the issues discussed at the event, which was presided over by Oscar Onyema, the Chief Executive, NSE, included the need to increase level of activities in the market via active participation of the domestic retail investors, revival of Initial Public Offers, IPOs, and the need to do more with regards to the protection of minority investors’ interest, especially as it relates to recent delisting of some companies among others. PETER EGWUATU & NKIRUKA NNOROM were there and captured the interaction for Financial Vanguard.

LOOKING at where we are going in 2018, particularly, the performance of the emerging markets, what efforts are you making to increase level of activities (velocity) in the market?

Mr Oscar Onyema, CEO, NSE

We have discussed extensively with the broker/ dealer community with regards to what we can do to improve market velocity, especially from the domestic investors. Some of the strategies that we discussed include the fact that if you actually take a very structured approach to investing where you diversify across different asset classes and within each asset class, you diversify as well, you will then have course to re-balance periodically and now generate transaction revenues. More importantly, it helps investors to meet their investment objectives.

So, when you diversify across different asset classes – fixed income, equities, other alternative asset classes – and then within equities, you diversify across industry, across market capitalisation, large-cap, mid-cap and small-cap stocks, the tendency is that if your target portfolio is 50 percent equity, within six months, due to market movement, you will need to re-balance. At that time, there will be some trading that needs to be done to put your portfolio back in balance. Those are the kinds of strategies we talked about.

Another thing we looked at is to really get close to the customers/investors and know what products they really want to use and what types of instruments they want to use in order to meet their investment objectives. We want to even train investors to understand that they need to save. Our savings culture is very poor in Nigeria as compared to the Asian countries for example.

What we find is that the culture in Nigeria is such that the domestic investors tend to buy and hold and hold it forever. What we will like to see is that people change with the changing tide. If a company is not doing well, rotate into a company that is doing better. If you have a particular view on a company, act on it.

And so, you will see us do a number of new things in 2018 with regards to getting market velocity improved. One is to deploy new technologies to get to lot more investors and to work with the brokerage community to ensure that we help those investors have portfolios that are well diversified and work with the brokerage community to ensure that we continually engage with these investors to keep their portfolios balanced.

What are you doing with regards to delisting of companies and protecting investors that invested in those companies?

Companies in their life cycle will list and some of them will delist over time. That is the reality that exchanges around the world experience. Companies will delist for different reasons from voluntary to regulatory delisting, mergers and acquisitions and other things that would cause them to delist.

Regulatory delisting

Our job is to make sure that we make it easy for companies to come in and if they want to leave, that they leave in an orderly manner. So, what we have tried to do with our listing rules in the last one to two years is that we have tried to enhance the rules to ensure that companies behave in an orderly fashion, especially companies that want to delist voluntarily and where there is a business purpose why they are delisting.

We cannot regulatory prevent a company that freely listed on our platform from delisting because it is not a prison. What we can do is to ensure that when they are leaving, there are certain things they must put in place for their shareholders and we believe that our current listing rules, which are bench-marked against other rules in other jurisdictions do provide those protections.

A delisted company does not just disappear; it is still a company. Some of the companies that have delisted from the exchange are trading on the Over-the-Counter, OTC, platform for example and so shareholders have access to liquidity in that platform. The other thing is that we require in certain circumstances, is for companies to escrow some amount of money and to ensure that the money is accessible to investors that do not wish to continue with them as an unlisted company.

The suggestion about some sort of collaboration among the Securities and Exchange Commission, SEC, Corporate Affairs Commission, CAC, and the NSE with respect to delisted companies is an interesting one, but a company has the right, you will recall, to say to the NSE, “am no longer listed and therefore, am no longer subject to your regulatory jurisdiction”. So, this is an issue that has to be weighed but it is still subject to regulatory jurisdiction if it is a public company of the SEC and if it is a company, which it is of the CAC.

And so, we need to be very clear that there are limitations around that for the fact that we are a market and it is a voluntary market and so if a company is leaving, we cannot forever continue to exercise jurisdiction over the company. So, we have used instruments such as indemnity obligations and a number of other creative legal instruments to ensure that for a period of time, the company has to continue to comply with some certain things such as paying out the investors in orderly fashion if they do not want to remain.

These are some of the issues we deal with when we deal with delisted companies. We do take the point, however, that there is a level of dissatisfaction around delisting. We are not saying that we do not recognise that or that we won’t for example look into the kinds of suggestions that have been made and see if whether we can, this year, go back and beef up our rules and processes with regards to delisting.

We actually do have a team that their job is to maintain a relationship with the existing listed companies and to make sure that we properly service those companies and to help them to extract the value of being listed at the exchange.

What are you going to do differently in 2018 in Mutual Funds and Unit Trust Funds in terms of disclosure, knowing that quite a good number of them do not talk to investors after taking their money?

For Real Estate Investment Trust, REITs, we have introduced the REITs conference just to get a lot more people understand what those instruments are. We have also introduced Draft Rules to improve transparency around the REITs products. For example, if occupancy rate drops, most people will not know. So, we have said that if there are certain potentially market moving news, it has to be out there. So, disclosure dynamics are being tightened for REITs. Reporting of financials are also being tightened for REITs and efforts to drive more understanding of that asset category is been made.

With regards to Mutual Funds, we have partnered with the Mutual Funds Association of Nigeria to create a new platform for distribution of mutual funds through the brokerage community and to also improve disclosure around mutual funds with regards to net asset value calculation and availability for the retail participants. So, those are some of the things you will see getting launched in 2018 to drive transparency in Collective Investment Scheme, CIS.

We have two classes of quoted companies like the insurance companies and banks that have binary reporting lines. These two classes of listed companies do disclose to their primary regulators in terms of financial forecast and some of them are trying to do that with the stock exchange as well. At what point are we expecting that these disclosures will also be made public so that we don’t have two classes of investors

We understand that the Central Bank of Nigeria, CBN, and the National Insurance Commission, NAICOM, are the primary regulators for these entities and so their financials have to be approved before coming to the exchange.

Non-public information

As you are aware, at the exchange, we have strict rules around staff of the exchange buying shares since we, sometimes, come in contact with the material non-public information. So, we have engaged other regulators to see if they can have similar rules so that when banks submit their financials to the CBN to review, at least that department that they submitted it to cannot act on that information. While we believe that right now, there is no gaming going on, we think that having written policies and procedures around that would be very helpful.

It is almost going to be practically impossible to say that when those financials are submitted to the primary regulators, that they should be released to other investors at the same time because they will have to look them and in some cases, they push back and have them make corrections. So, investors have to get information that is as christened as possible in order for them to make investment decisions.

However, we have to continue to push that nobody takes advantage of material non-public information and indeed, just this week, we activated the auto-flow functionality in our X-Issuer platform so that companies can directly engage with the market without even the exchange itself intervening. So, we will continue to push and hopefully, we will be able to announce that all the regulators have adopted the same standards that we have at the exchange.

You spoke about efforts you would make to attract retail investors to the market and no mention was made of institutional investors with regards to Pension Fund Administrators, PFAs, and insurance companies. What will you do to bring this set of investors to the market?

It is not that we are not going to continue our engagement with institutional investors, but what we have noticed from our analysis is that when you actually look at the performance of 2017, you will see that the growth the entire market has recorded was primarily driven by institutional investors, both foreign and domestic.

The retail investors only grew by 37 to 39 percent in terms of activities. So, we understand that we need to increase penetration with the retail investors. If you look at our data base, we probably have about seven million investors in a country of 180 million people. So, we think we can do better in terms of getting a lot more to participate in the market and participate in an active way in the market with portfolio re-balancing so that we can have better velocity in the market.

Are the market makers still in the market If they are, Are they still the same number that were registered then or has the number reduced. Again, what is their contribution to the market growth?

There are still market makers in the market. We are not satisfied with their participation rate and how they catalysed growth in the market, especially when we needed them to participate in the commodity down cycle. So, we have taken a critical look at it and we have engaged with market makers and other market participants and in 2018, we are going to see a significant change in the structure of market making and the rules around market making. We are looking at it and we intend to make significant changes.

What are you doing to attract more IPOs to the market this year?

There are a number of companies that have indicated interest to do IPOs but however, an indication of interest is different from doing an IPO. So, we will continue to engage with those companies and see which one we can bring to the market.